Fears that the unrest in North Africa and the Middle East could seriously disrupt oil supplies and throttle the world economy turned to reality yesterday and propelled the price of oil to more than $108 a barrel during trading, the highest since September 2008. It was $85 at the start of the year. The region supplies a third of the world's oil needs.

Analysts said that if the unrest in Libya, a major oil exporter, spread to more important powers such as Iran and Saudi Arabia then "the sky's the limit" for oil prices and $150 a barrel could be reached "without breaking a sweat", with grim implications for economic recovery, inflation and living standards worldwide.

Of special concern are reports that Libyan exports are being interrupted by disorder at the terminals and major players such as Royal Dutch Shell, ENI of Italy and Repsol of Spain cutting output and evacuating staff. More than 8 per cent of Libya's 1.6 million barrels a day of production has been shut down by the violence, which has been concentrated in the eastern province of Cyrenaica, home to the bulk of Libya's reserves.

Yesterday Tripoli claimed extraordinary circumstances and began blocking exports, which threatens to choke off supplies from the country completely.

Libya is responsible for 2 per cent of world supplies and while Opec powers such as Saudi Arabia and Iran could easily make up a shortfall if its production was lost, a worst case scenario is being contemplated by traders – that these autocracies too may not be immune to the revolutionary fervour that has so unexpectedly swept the region since the riots began in Tunis at the start of January.

Responding to concerns over disruption to oil supplies, the US government told Reuters last night that Saudi Arabia could indeed ramp up production and replace Libya's crude oil exports within one month.

As things stand Opec has around 5 million barrels a day of spare capacity, more than sufficient to offset any Libyan shortfall, and Western oil stocks are relatively plentiful. Yet the economic damage caused by the crisis may be more insidious and more substantial than the crude numbers suggest. If the unrest succeeds in fracturing business and consumer confidence more widely, then the effects on the real economy in the West could easily outweigh a small short-term loss of oil supply.

The doubts are certainly sending stock markets around the world tumbling. During the day the FTSE-100 index slipped by around 1.5 per cent, before recovering to close the day down just 0.3 per cent, with similar losses on the American, German and French exchanges. Markets in China and Japan also fell back, with the earthquake in New Zealand adding to the tension. As heavy users of fuel and vulnerable to any further cutbacks in consumer spending, the world's airlines saw their share prices hammered as were the stocks of the oil majors.

As oil shot up Yinxi Yu of Barclays Capital said: "The market is very nervous over news of violence in Libya and that's driving prices. It looks like the uncertainty in the region is not going to be resolved soon."

Oil prices are now heading for the record of $147 or so set in 2008 although that was because of high demand at the end of a long economic boom. The current supply problems at a time of feeble Western growth are potentially much more serious.

For British consumers the oil price record is closer than it first appears. Given the depreciation of sterling over the past two years, which has reduced its buying power on world markets by about a fifth, oil prices are now only around 10 per cent below their 2008 peaks in sterling terms. The effects are already being felt on garage forecourts where petrol and diesel prices are at all-time highs of around 130p a litre, close to £6 a gallon.

Although Western economies are less dependent on oil than they were during previous "supply shocks" in 1973 and 1980 – having improved fuel efficiency and diversified out of energy-hungry industries – a dramatic rise in the oil price will push inflation higher, including transportation costs especially for food, itself increasingly expensive, and will knock-on to gas and electricity bills.

Higher inflation and stagnant output would also spell a return to the nightmare of an intractable "stagflation" not seen in the UK for decades. A small windfall from North Sea oil prices and tax revenues would be far outweighed by the depressing effect on the economy as a whole.

At a press conference last week the Governor of the Bank of England, Mervyn King, offered the view that commodity prices might not rise as fast in the next year as in the past one; that now seems less probable. That may force the Bank to raise interest rates to guard against inflation taking off as the oil price spike feeds through to the high street.

The Council of Mortgage Lenders said a 0.25 per cent rise in rates would add about £40 a month to the average British mortgage bill, at a time when consumers are hard pressed from tax hikes, inflation and minimal pay rises. As the most expensive item by far any Briton is likely to buy is their home, the most important effect of the turmoil in the Middle East will be to increase the cost of borrowing to buy a house, though home values themselves could slump under the psychological hit to confidence.

A global trend towards higher interest rates could easily choke off the fragile recovery in the world economy, while an oil price rise usually acts as a sort of tax, sucking spending power out of Western nations. Even the fast growing economies of China and India would stumble. That could push the world back into recession, while the scale of public borrowing during the 2008-09 recession has left many governments with little "fiscal headroom" to boost their economies, assuming they wanted to abandon the current drive for austerity. The suicide of one desperate young man in Tunisia in January continues to transmit economic as well as political shock waves to every corner of the planet.